By Howard Schneider
WASHINGTON (Reuters) - The U.S. Federal Reserve wrestled with whether to nod to financial market volatility and a weakening global economy in its policy statement last month, but opted not to out of worry it could send an unwarranted signal of pessimism.
Minutes of the U.S. central bank's Oct. 28-29 meeting released on Wednesday also indicated a vigorous debate among policymakers over how much weight to give to signs that inflation expectations were slipping, potentially undermining their effort to bring the pace of price increases back up to their target.
"Many participants observed that the committee should remain attentive to evidence of a possible down shift in longer-term inflation expectations," the minutes said. "Some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered."
Major central banks throughout the world are facing a similar dilemma over inflation, with neither prices or wages increasing the way policymakers had hoped.
"The wording would suggest greater pessimism" about the U.S. outlook, said Robbert Van Batenburg, director of market strategy at Newedge in New York. "They didn't want to create fears."
U.S. stocks, government bonds and the dollar gyrated after the minutes were released as investors struggled to determine whether the new expressions of concern might mean the Fed would hold off longer on hiking interest rates. In the end, financial markets still pointed to a rate rise next September.
WHAT THEY DIDN'T SAYThe statement Fed officials issued after their gathering last month largely sloughed off a mid-October global market meltdown and ebbing growth in other economies, and the minutes indicated policymakers remained confident that the U.S. economy would continue to make progress.
But they also reflected a complex discussion.
Officials decided to leave out any mention of volatility in stock and bond markets in part to avoid "the misimpression that monetary policy was likely to respond," the minutes stated. A similar debate and conclusion surrounded the weakening economies of Europe, Japan and China, and the impact of a stronger dollar.
The U.S. central bank is in a tricky phase, trying to wind down crisis era policies and engineer a return to more normal interest rates, while guarding against any economic downturn.
Last month, it wrapped up a bond-buying stimulus program, throwing the debate forward to when it will raise benchmark borrowing costs from near zero, where they have been pinned since late-2008.
The minutes said a number of officials felt it would be wise to provide some clarity soon on how swiftly rates might rise. In addition, in discussing a long-term strategy statement officials plan to issue in January, the minutes said there was "widespread agreement" that inflation both above and below the central bank's 2 percent target was equally costly.
According to the minutes, a solid core of officials said the Fed needed to remain vigilant about signs that public and market expectations about inflation were shifting down - a worrisome development that might increase the risk of stagnation or outright deflation.
The minutes indicated that officials held an extensive discussion about whether to keep language stating that the Fed would hold rates low for a "considerable time." The camp that argued removing it might foster the mistaken impression of an imminent rate rise won the day.
(Reporting by Howard Schneider; Editing by Tim Ahmann and Richard Chang)